Employment protection and stock price crash risk: Evidence from China’s introduction of the labor contract law

Abstract

Using exogenous variations associated with the introduction of China’s Labor Contract Law, this paper investigates whether and how employment protection affects stock price crash risk. We document evidence of a significant increase in future stock price crash risk by 48 %, at least for those most affected firms relative to those least affected following the law’s introduction. Further analysis suggests that the positive relationship is more pronounced for firms with low-cost elasticity, high labor expenditure, and low firm profitability, for firms facing more asymmetric information, firms with weak corporate governance, non-state-owned enterprises (SOEs), and firms in regions with relatively weak labor protection. Taken together, our study highlights the importance of employment protection in shaping corporate behavior. [141 words]